New Trade $COST: Fading the Div Enthusiasm W/Stock at All Time Highs

by Dan December 5, 2012 2:33 pm • Commentary

Event: report fiscal Q1 earnings on 12/12/12 (prior to the open), the options market is implying about a 2.5% move vs the 4 qtr avg of about 1.5%.

COST has been a monster this year, up nearly 26% and just today making new all time highs.   The company has been the beneficiary of the predominate exposure to North American consumers, while they have been taking share from other wholesale retailers.  The company has nearly 10% of their market  cap in cash, and has recently decided to payout a $7 special dividend, which would equate to almost their entire cash balance at current levels.  Since their Nov 28th announcement of comp store sales that were inline with analyst expectations, and the announcement of the special dividend (stock goes ex-div tomo) the stock has been up 9%.

Technicals: The recent break-out to the upper end of the uptrend that has been in place from the lows in 2009 could be getting a bit extended and could re-trace back to $100 or so on any disappointing news.

COST 3 yr chart from Bloomberg


Valuation: Despite the company’s stellar performance in a difficult retail environment  and their generous agreement to return cash to shareholders, the stock at current levels is getting quite expense relative to it’s historical valuation range. Looking at the chart below of the 7 yr PE range it becomes evident that it is getting a tad stretched trading at 23x next years expected earnings of $4.50.

COST 10 yr PE range from Bloomberg


MY VIEW:  the stock of late has benefited from market participants gaming the special dividend payment, lots of cash has rushed into the name in the last weeks.  My sense is that so of the “fast money” could look to exit the stock as we get past the ex-date and if especially if there are any fundamental negatives from next week’s earnings report.

While I generally shy away from buying or selling stocks on valuation, taken as one of many inputs, COST lines up as a decent near term trading short.  Vol is cheap, and at the money options look like the way to play from a directional stand point, I am starting with an outright put purchase but will look to leg into a vertical on any weakness prior to earnings.

TRADE:  COST ($105.28) Bought the Dec 105 Put for 1.80

-Bought 1 Dec 105 Put for 1.80

Break-Even on Dec Expiration:

-Profits with stock 103.20or below

-Losses of up to 1.80 btwn 103.20 and 105, max loss of 1.80 above 105.